The African Consumer Market

Following a decade of average increases in real GDP exceeding 5%, African economies are expected to sustain high levels of economic growth over the next decade boosted in part by domestic demand due to a steady increase in private and public investment1. In turn, rising real incomes will lead to higher consumer spending which is projected to almost double in the next decade. A growth of 4.5% in per capita GDP compounded annually through 2015 would result in an increase of more than 35% in consumer spending in Africa2. Although the expansion in consumer spending will be led by South Africa and Nigeria, the two largest economies in Africa, which account for 51 percent of Sub Saharan Africa expenditure, emerging markets across the continent are also making their mark (see Table 1).

Table 1: Africa’s emerging consumer markets

EAC & COMESA

Population (2009)

2010 Consumer spending§

2020 Consumer Spending§a

Kenya

40m

$23bn

$37bn

Ethiopia

83m

$20bn

$43bn

Uganda

33m

$15bn

$30bn

ECOWAS

Nigeria

151m

$115bn

$167bn

Ghana

24m

$15bn

$29bn

Senegal

13m

$10bn

$16bn

SADC

South Africa

49m

$215bn

$315bn

Angola

19m

$14bn

$18bn

Zambia

13m

$10bn

$23bn

Source: Euromonitor Africa Consumer Spending 2010

§\In constant 2010 prices

a\Projections

Main catalysts of the African consumer market

In addition to economic growth, other factors likely to play an important role in the evolution of the African consumer market include: population growth, urbanization rates, falling poverty levels coupled with an emerging middle-class, improvements in the business environment, increased levels of trade openness, and technological innovation.

Population growth and urbanization: The African population is growing at 2% per annum. The continent’s total population is therefore projected to increase by 50% from 1 billion in 2010 to over 2 billion by 2060. At the same time, the percentage of Africans living in cities is expected to increase to 50% in 2030 from 37% in 2009. Together, these two factors will foster the number of new consumers entering the African market.

Poverty reduction and the emergence of the middle class: With high levels of economic growth across the continent, poverty levels as a percentage of total population are forecast to decline to 20% in 2020 from 48% in 2008. In turn, the “middle class” (i.e., people earning between USD2 and USD20 a day, in real terms) is expanding in Africa. In 2010, 34% (313 million) of Africa’s population was considered to be middle class3. This figure is projected to triple to about 1 billion people by 2060. The combined effect of poverty reduction and middle-class expansion provides huge potential for greater spending in the consumer goods market.

Business environment and lower trade restrictions: An improved business climate and political stability will likely attract global investors to African markets. In addition, greater trade liberalization between African countries and their international partners will reduce the cost of doing business and increase the availability of consumer goods in Africa. Together, this will both reduce the cost and increase the variety of consumer goods purchased by the emerging middle class.

Use of technology: By end of 2012, more than 50% of Africans (about 735 million people) will own a mobile phone, making the continent the fastest growing cellular phone market in the world and the second largest market by number of connections after Asia4. By 2030, almost all Africans will own a mobile phone. This technological innovation will enable companies to reach existing and potential customers through marketing and other promotions via their mobile phones. Furthermore, the increased use of mobile phones for banking transactions may boost demand for consumer goods, especially in rural and informal markets thereby shrinking the shadow economy.

Challenges to Increased Consumer Spending

In spite of the substantial growth prospects for consumer spending, key challenges remain, with regard to market structure, distribution channels, and level of skills.

Market structure: Africa’s consumer market is heterogeneous and highly segmented. Due to different income levels between countries and within countries, and due to cultural, geographical, and language differences, the behavior and spending power of African consumers vary widely. Foreign companies and retailers wishing to penetrate the African market will therefore need to take into account these differences in developing their products and marketing strategies to suit the needs of particular segments of the market. Tailoring products to customers’ needs and decreasing costs in order to compete with local companies, are among the alternatives that larger foreign companies can use to overcome this challenge.

Distribution channels: Companies must also confront the challenges of poor distribution channels and underdeveloped transportation and other infrastructure services in order to gain access to customer markets. Strong sales networks, including direct-distribution and wholesale, would need to be developed in order to penetrate consumer markets and gain market share.

Level of skills: Recruiting well-trained employees with experience in marketing is another key challenge facing retailers. The current dearth of skills across Africa is worrisome, and reversing this trend may require massive investments in training, especially in business related skills. In order to achieve long-term success and viability, companies may therefore need to initially rely on international staff whilst investing in training of local agents to build capacity, mainly through apprenticeship programs.

Overcoming these challenges will be costly, but over the long-term the benefits will likely outweigh these costs. From a policy perspective, the authorities will need to devise better policy instruments to better deal with the potential impact of inflationary pressures that may be fuelled by a rise in excess consumer demand.